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Ferguson Unrest Shows Why Fannie, Freddie Are Still Needed: Bove

NEW YORK ( TheStreet) -- The social unrest in Ferguson, Mo. shows why Fannie Mae(FNMA) and Freddie Mac(FMCC) are still needed to keep home ownership affordable for many Americans, banking analyst Dick Bove said Wednesday.

The government-sponsored enterprises (GSEs) purchase home mortgages and then securitize them for sale on the secondary market, making mortgages cheaper and easier to get. The financial crisis of 2008, however, required the U.S. government to bail out both Fannie and Freddie, prompting President Obama's stated goal of winding down the two agencies.

"The riots in Ferguson City may have been set off by a police incident, but a look at the basic statistics of the city suggest that deep-seated economic and demographic issues may really be at the heart of the trouble," wrote Bove, an analyst at Rafferty Capital Markets, in a report published Wednesday.

Bove believes if the unrest in Ferguson spreads to other parts of the country, Congress will respond with legislation ensuring the GSEs continue to exist so many Americans can continue to obtain 20- and 30-year mortgages.

"The housing industry in the United States is in all probability the largest subsidized industry in the country," Bove wrote. "The reason that the industry is so heavily subsidized is social unrest." Bove pointed to social upheavals after the Great Depression that led to the creation of Fannie Mae as well as numerous housing subsidies, including the 20-year fixed-rate mortgage, the Federal Housing Authority and FDIC insured deposits. It was riots in the 1960s that led to the creation of Freddie Mac in 1970, he contended.

In a follow-up phone interview with TheStreet, the analyst expressed surprise that President Obama and several members of both major parties in Congress have proposed eliminating Fannie and Freddie through legislation such as the Housing Finance Reform and Taxpayer Protection Act. That bill, better known as Johnson Crapo, passed the Senate Banking Committee and attracted more support than any other legislation aimed at determining the future of Fannie Mae and Freddie Mac. Still, it died in the Senate after several key Democrats refused to sign it.

Among the centrists who have supported the wind down of Fannie and Freddie is Rick Lazio, a New York Republican who served four terms in Congress from 1993-2001 and became chairman of the House Banking Subcommittee on Housing and Community Opportunity.

"I think I understand Dick's premise. I would just say there are some things in Ferguson that are unique to Ferguson," said Lazio, now a partner at law firm Jones Walker, in a phone interview.

Still, the former legislator conceded, "I don't totally discount the fact that there is some element of hopelessness and pessimism about the ability to be financially secure and to have financial income and wealth mobility that is causing lots of anxiety among Americans black and white, especially who are in the working class or struggling--kind of the working poor."

Lazio also acknowledged that winding down Fannie and Freddie would likely cause mortgage rates to rise "significantly."

"In times of financial stress you'd see the flight of private capital so there would be a lack of consistency and predictability," he added. "That's a problem for the economy and we wouldn't want to see that happen. I guess I don't think in terms of absolutes: it's got to be just the way it is or it's a crisis. I think we can make the reforms and changes in Freddie and Fannie that people support on a bipartisan basis."

Ultimately, however, Lazio faults President Obama for not expending political capital to push Johnson Crapo forward.

The President, according to Lazio, must "explain to the American public that having uncertainty for an extended period of time makes homeownership that much more difficult. It's bad for rates; it's bad for homeowners; it's bad for drawing in private capital. Overall the lack of resolution is bad and that would only be equalled by a resolution that was counterproductive," Lazio said.

Counterproductive is probably not a strong enough word to describe Bove's opinion of Johnson Crapo. The analyst is at least as critical of President Obama as Lazio--but for supporting the legislation in the first place.

"This President who is supposedly tied toward the minority community-- who's supposedly tied toward creating jobs for people throughout the economy-- simply has turned his back on the whole situation. And this Congress has forgotten why we have all of these programs. Everybody runs around saying Fannie and Freddie were big failures. They were not big failures: they were massive successes."

Bove argues, citing a 2008 report in the
Village Voice, that President Bill Clinton and his Housing and Urban Development Secretary at the time, Andrew Cuomo (now Governor of New York) were responsible for corrupting Fannie and Freddie because they pushed them into ever-riskier loans without requiring them to disclose details about the increasing risk they were taking on.